Question

Under what conditions might a lead firm choose to develop a supplier rather than replace them?

Answer 1

A lead firm will always try to develop supplier instead of replacing because of the following reasons:

a. In order to create a positive image in the market.

Changing of suppliers might create a negative image of the firm in the market, so in order to create a positive image the firm will not change its suppliers and will try to maintain cordial relations with the existing ones.

b. Maintaining the cash flow

The firm usually take the goods from the suppliers on debt and pays back within a fixed payment cycle. At times of financial crisis, if the firm has reliable and old suppliers, the payment cycle can be stretched for a limited period. That is why the firm tries to maintain and keep its existing suppliers instead of replacing with new ones.

c. Bargaining power

The firm can bargain and negotiate with its existing suppliers and keep the goods on credit. This would not be possible if the firm will keep on changing its own suppliers.

d. Maintaining the quality of the product.

Changing suppliers might affect the quality of the product of the firm that will affect the business in the long run. So, in order to maintain the overall quality and keep the trade secret within its stakeholder the firm will try to keep its existing suppliers.

e. Increases the profit margin

The firm which have existing suppliers will have more bargaining power and can have goods at less cost in comparing to its competitors. Thus, will have more profit margins for itself.